Do shareholder agreement clauses bind a company if not in the Articles?

No. If the Articles are silent, a clause in a shareholder agreement is not binding on the company unless it is incorporated into the Articles.

What was the dispute in World Phone India v WPI Group?

Whether an ‘affirmative vote’ right in a joint venture/shareholders agreement could control board decisions when the Articles did not contain that right.

What did the Delhi High Court decide?

The Court held the agreement clause could not be enforced against the company because it was not part of the Articles of Association.

Practical lesson for startups and JVs?

Always align the shareholder agreement with the Articles. If a right must bind the company, put it expressly into the Articles.

world-phone-india-v-wpi-group-2013-delhi-high-court

Shareholder agreement vs Articles of Association concept

Quick Summary

Question: If a shareholder agreement (SHA) gives an affirmative vote right but the Articles of Association (AOA) are silent, does that right bind the company?

Answer: No. The Delhi High Court said SHA clauses are not enforceable against the company unless they are written into the AOA.

Issues

Are SHA provisions, not inconsistent with the Act but absent in the AOA, applicable to company decisions?
Can an affirmative vote right (veto) in a JVA/SHA control the Board if the AOA does not say so?

Rules

Where the AOA is silent about an affirmative vote, a matching clause in a SHA is not binding on the company unless incorporated into the AOA.
Company governance flows from the Companies Act and the AOA; private agreements cannot override or replace the AOA.

Facts (Timeline)

Timeline of share transfers and board decisions affecting control

WPIPL shareholding: WPI Group 43.75%; Mr. Vivek Dhir 43.75%; Mr. Pankaj Patel 12.5%.

22 Sept: Mr. Patel’s shares transferred to Mr. Dhir and Mrs. Malini Dhir (also made Additional Director).

31 Oct Board Meeting: Resolution for a rights issue (1,49,303 shares) as per AOA. Mr. Aditya Ahluwalia (WPI) absent—he was abroad.

After transfers, WPI’s chairman, Mr. Ahluwalia, became a minority voice.

WPI challenged the meeting citing Clause 6.2 of the JVA/SHA, claiming an affirmative vote for Mr. Ahluwalia on all key matters.

Dispute: Can this SHA veto apply when the AOA does not provide it?

Arguments

WPI Group (Petitioner)

JVA/SHA gave affirmative vote to Mr. Ahluwalia.
Board decisions without that assent are invalid.
SHA terms should operate since they do not violate the Act.

WPIPL & Others (Respondents)

Company acts under the AOA; it is silent on any affirmative vote.
Private SHA cannot bind the company unless in the AOA.
Rights issue complied with the AOA; absence of one director does not void it.

Judgment

Held: Even if an SHA clause is not contrary to the Companies Act, it cannot be enforced against the company if it is not part of the AOA.

Since the AOA had no provision for an affirmative vote, the claimed veto in the JVA/SHA could not control the company’s internal decisions.

Ratio (Legal Principle)

Company governance is anchored in the AOA. Private contracts supplement but do not supplant it.
Rights like affirmative vote/veto bind the company only if incorporated into the AOA.

Why It Matters

For JVs and startups, this case is a compliance checklist: if a governance right must bind the company, put it in the Articles and follow due process to amend them.

Key Takeaways

AOA Rules

Articles govern internal decisions; SHAs cannot override them.

Incorporate Rights

Affirmative vote rights must be in the AOA to bind the company.

Minority Protections

Protective vetoes require proper drafting and Article amendments.

Exam Tip

Always ask: “Is it in the AOA?” If not, it likely won’t bind the company.

Mnemonic + 3-Step Hook

Mnemonic: “S-H-A → A-O-A” — Set it in SHA, but to Have it Apply, put it in the Articles Or it’s not Applicable.

Spot the governance right (affirmative vote/veto).
Check if it is in the AOA.
Apply: If absent, it won’t bind the company—amend the Articles.

IRAC Outline

Issue: Are SHA clauses enforceable against the company when the AOA is silent?

Rule: No—unless the clause is incorporated into the AOA; AOA + Act control.

Application: The JVA’s affirmative vote clause was not in WPIPL’s AOA; Board acted per AOA; SHA clause could not bind the company.

Conclusion: Court declined to enforce the SHA veto; AOA prevails.

Glossary

Articles of Association (AOA): The company’s internal rulebook that binds members and the company.
Shareholders Agreement (SHA): A private contract among shareholders; does not bind the company unless reflected in the AOA.
Affirmative Vote: A protective veto right; certain actions need consent of a specified shareholder/director.